August 25, 2006

It's becomming "the story." This has to go on for a while, for the news to filter out to "the masses." In a few weeks it will be generally understaood that housing prices are heading down. Next will be stories about how fast prices are dropping, and then about people being hurt by this. Each will feed the next phase.

A backlog of unsold new homes continues to pile up. Last month there were 568,000 new homes on the market — enough that it would take 6.5 months to sell them all at the current sales rate. That is the most in more than a decade.

All of this is not to downplay what is essentially a recession in housing. Housing starts sank further in July. Permits to begin new construction plunged close to a four-year low, and an industry measure of builders' sentiment sank to a 15-year low. Forward-looking indicators from declining mortgage applications to depressed attitudes of potential home buyers to moribund buyer traffic in model homes indicate more weakness to come.

Economists said the market for new homes may be in worse shape than the government's figures show because they don't take into account rising cancellations reported by many home builders in recent weeks. "This was probably an even weaker month than it looks," says Michael Carliner, an economist with the National Association of Home Builders.

Krugman - all you need is the headline: Housing Gets Ugly, but I'll quote just a bit:

Why the sudden crackup? When prices were rising rapidly, some people bought houses purely as investments, betting that prices would keep going up. Other people rushed to buy houses, or stretched themselves to buy houses they couldn't really afford, because they feared that prices would rise out of reach if they waited. And all this speculative demand pushed prices even higher. In other words, there was a market bubble.

But eventually prices reached a level beyond what even optimistic potential buyers were willing to pay, especially after interest rates rose a bit. (They're still low by historical standards.) As demand fell short of supply, double-digit price increases declined into the low single digits, then went negative everywhere except in the South.

And with prices falling in many areas, the speculative demand for houses has gone into reverse, as people try to get out with a profit while they still can. There's now a rapidly growing glut of unsold houses. This is a recipe for a major bust, not a soft landing.

Posted by Dave Johnson at August 25, 2006 1:43 PM

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